Union Budget 2016: Answers to these 6 questions will determine if Jaitley delivered a dream or dud

The Union Budget 2016 is a tightrope walk for Arun Jaitley, the lawyer-turned-politician in Prime Minister Narendra Modi's Cabinet, not just because Indian economy is passing through a painfully tough phase but this budget is also a test for Jaitley to prove his skills in the finance ministry (there aren’t many fans for Jaitley as FM) at a time when investor skepticism on India is rising.

If Jaitley fails to get the fiscal arithmetic and his budget priorities right, Modi’s task of reviving economy can greatly suffer. Jaitley’s challenges are on multiple fronts—some are political in nature, while some pertains to matters of economic prudence.

Finance Minister Arun Jaitley. Image courtesy PIB

The 7.6 percent GDP growth projected for fiscal year 2016 has been contested by many on account of a major disconnect between the growth numbers and other high-frequency growth indicators in the economy such as flow of bank credit, pick up in the manufacturing segment, muted corporate earnings and a heavily stressed banking sector.

The world acknowledges that India is in a ‘sweet spot’ among the emerging markets. But, has the country managed to cash in on this opportunity is the question. As Jaitley presents the Union Budget 2016, there are a few questions that arise. The fate of his budget hangs on how successfully he answers these questions:

Can Jaitley adhere to the fiscal consolidation roadmap without compromising heavily on public-spending?

Evidently, there is immense pressure on the government to stick to the fiscal deficit targets set at 3.9 percent in fiscal year 2016, 3.5 percent in 2016-17 and 3 percent by 2017-18. International rating agencies and Reserve Bank of India (RBI) have issued warning signals on the critical importance of fiscal consolidation and dangers of a fiscal deficit-driven growth.

Yet, Jaitley’s big task is to make sure engines of economic growth aren’t failing. The Economic Survey announced on Friday, ahead of the budget, spelled out the first priority for Jaitley to deal with in the budget — ensure that growth momentum is on. “This is because the current environment is fraught with risks, which threaten all the engines of India’s growth,” the Economic Survey said.

Also, the private sector investment cycle is yet to kick in to aid growth. At this juncture, clearly, public-spending to push infrastructure and manufacturing growth is crucial to speed up economic recovery even though Jaitley will have to settle for a slightly higher fiscal deficit target. Will he do that?

Can Jaitley lay out a convincing roadmap to address the crisis that has gripped India’s government-owned banks?

Jaitley, as finance minister, has failed so far to get hold of the root of the problems that has engulfed India’s Rs 95 trillion banking industry. He underestimated the capital needs of state-run banks in the initial days of this NDA government when he allocated merely Rs 11,200 crore and refusing to think of radical reforms in the baking sector such as merging small banks having synergy and bring in private capital.

His banking sector strategy fell short of what was needed to revive state-run banks. Though Jaitley recognised the issues later and offered more capital (Rs 70,000 crore over five years), it came too late and too little. India’s banking industry, 70 percent dominated by state-run banks, is in the midst of a crisis now with their total bad loans exceeding Rs 400,000 crore at the end of December and more likely to come from the restructured loan segment if economic recovery doesn’t happen as expected.

The ‘Indradhanush’ package announced by Jaitley lasy year to revive PSBs isn’t adequate to set these institutions on safer path. It’s time for bold steps. The question here is can Jaitley think out of the box and spell out a solid roadmap to save India’s sarakari banks?

Can Jaitley assure investors with continuity in the reforms process in budget speech and arrest eroding investor confidence?

The Modi government’s trump card in the run-up to the Lok Sabha elections in 2014 was rapid economic growth through big-ticket reforms. It has indeed achieved progress on several small-ticket reforms such as insurance Bill, opening up the FDI in several sectors, bring in JAM (Jan Dhan, Aadhaar and Mobile) movement to facilitate financial inclusion and subsidy rationalization process by ay of Direct Benefit Transfer (DBT).

But, the investors want the promised large-ticket reforms such as the long-pending Goods and Services Tax (GST), reforms in land acquisition for industries and easier labor laws. On this part, the Narendra Modi government hasn’t yet managed to make any meaningful progress since a consensus is absent yet between the incumbent BJP and opposition parties on key issues including GST.

As Firstpost highlighted in an earlier article the Modi magic that worked wonders for stock markets is long dead and gone as reflected in the domestic equity markets. It is time for the government to acknowledge the actual state of the economy and work on solutions. Can Jaitley reassure the skeptical investors of reforms continuity and Modi’s pro-industry, pro-investor stance?

Can Jaitley come with solutions to revive the struggling rural economy and address the price rise?

The stress in India’s rural economy has been highlighted as an area of concern for economists, since majority of India lives in villages, work in unorganised sector and heavily rely on farming to eke out a living. The crop insurance scheme announced by Modi recently promises relief to the farmers who are hit by two successive drought seasons and unseasonal rains.

The sharp rise in prices of essential items, especially those of pulses, has hit the rural India hard. Given that the advantage of low-crude oil prices, that helped India to contain inflation in last year, may not sustain going ahead, there is a danger of inflation resurging.

The fact that inflation is more on account of supply-side issues, the RBI monetary policy can’t do much to address the food price inflation. Can Jaitley assure the common man with a solid plan of action from the government’s side to check price rise?

Can Jaitley assure government action to deal with stalled projects?

Going by the reports of the Centre for Monitoring Indian Economy (CMIE), the number of stalled projects has been on the rise in recent quarters again after a period of improvement. The bad loan crisis in the banking sector has severely constrained the ability of the banks to fund long-gestation infrastructure projects.

That apart, delays in project implementations have resulted in huge cost-over runs to companies. The corporate sector will eagerly look for measures that can ease their burden especially in the infrastructure projects. Can Jaitley’s 2016 budget give provide relief to companies?

The fears of so-called tax terrorism have returned to haunt companies when Indian tax authorities sent a notice to Vodafone Plc, which is engaged in an arbitration with the government in a tax case, threatening to seize assets if the company did not pay up $2.1 billion or Rs 14,300 crore in taxes.

Apart from Vodafone, a host of other corporate biggies such as Cairn Energy and Nokia too have been slapped such tax demands by the Indian authorities. The tax law had severely damaged the country's image among the investor community. This goes against the promise of Modi to industry about ease of doing business and a promise to end UPA’s tax terrorism. Can Jaitley’s budget sooth the nerves of companies?

The final verdict on Jaitley’s 2016 Union Budget will depend on whether he can answer these questions.